Are you mystified that the S&P 500 is only down 13% from its February high and the NASDAQ is slightly positive year to date? You would think that all the bad economic numbers would dampen investor’s confidence in owning stocks. However, publicly trading companies on Wall Street have a number of advantages over Main Street.

When it comes to government bailouts and subsidies, large public companies seem to be first in line. There are always claims that help is needed to save jobs or what they produce is an essential product or service. However, many of these companies used their cash to buy back stock and pay big executive bonuses instead of saving for a rainy day. (Airline industry)

The Federal Reserve’s zero interest rate policy helps large public companies to sell bonds at low rates to stay afloat, a huge advantage over small and medium sized privately owned companies.

The Federal Reserve has the bond and stock market’s back. They are adding liquidity to the bond market by buying corporate debt and even buying high yield or junk bonds to keep interest rates low. This allows even the worst run companies to avoid bankruptcy.

Why I think that Wall Street shouldn’t be so optimistic regarding an economic recovery:

I agree with comments made by Fed Chair Jerome Powell who cautioned of a potential credit crunch as stimulus dollars start to dry up. The result would be the loss of thousands of small and medium sized businesses across the country. Owners of many bars, restaurants, gyms and clothing stores have stated that they are fearful of being able to cover their operating costs while limiting the number of customers allowed into their premises.

So far, 32 publicly traded companies have already filed for bankruptcy protection under chapter 11 which leaves many of their employees, suppliers and shareholders high and dry. The economic pain from Covid 19 could be long lasting as more companies file for bankruptcy protection. The recovery may take some time to gather momentum as some jobs will never come back.

It is hard to comprehend that Wall Street is dismissing the fact that all the jobs that were created over the past ten years have disappeared in just under three months. . The weekly jobless claims will continue to be momentous and don’t included workers who want a full time job but are working part time. It also doesn’t include many Americans who are out of work and don’t qualify for unemployment insurance.

I wonder, is it even possible to get people back to work without safely opening up schools and daycares? France reopened their schools last week and 70 new cases of Covid 19 were found in seven schools forcing them to close them again. A new concern for parents is an outbreak of a inflammatory syndrome in children that is linked to Covid 19. Cases of Inflammatory syndrome have been diagnosed in 27 states in the United States.

Doctors have warned that many U.S. states have reopened without meeting CDC guidelines. The number of positive cases have spiked already in 14 states over the past few weeks. A rising death toll in the U.S. hasn’t stop many Americans from avoiding large social gatherings, ignoring social distancing guidelines and refusing to wearing a mask. There is a high probability that another spike in cases and deaths will dampen consumer spending.

Lastly baby boomers, (60 to 75 years old) have the most disposable income and also face the highest risk of dying from Covid 19. As a baby boomer, I will be avoiding the all travel and leisure activities.

Air travel

Cruising

Resorts and hotels

Movie theatres

Sit down restaurants

Casinos

Theme parks

Sporting events

Concerts

I will avoid anywhere there is large gathering or requires close personal contact. I am not going to risk my life to get a haircut or go to my local pub to watch a sporting event. It is just a matter of time when Wall Street profits will be affected by lack of consumer spending.

If I was a U.S. prosecutor, I would charge Trump with involuntary manslaughter. In case you don’t know what that is; charges of involuntary manslaughter is defined as an unintentional killing that results either from negligence or recklessness. An example is a motorist driving under the influence of alcohol or drugs resulting in a deadly car crash killing another individual.

Trump realized that if the body count from COVID-19 in the U.S. reached pandemic levels during 2020, his re-election bid could be in serious jeopardy. On Jan 21, the first American was diagnosed with the virus. A day later in Davos, Trump was asked if he was worried about a global pandemic.

“No, not at all” he stated. “And we have it totally under control. It’s one person coming in from China, and we have it under control.

On Jan 30 during a campaign rally in Michigan, Trump provided an update on the spread of the virus in the U.S. to a rowdy crowd of supporters.

“We have it very well under control. We have very little problem in this country at this moment with 5 and those people are all recuperating successfully.”

On Feb 2, Trump bragged about his China travel ban on Fox News. He told Sean Hannity and a national audience that:

“We pretty much shut it down coming from China.”

Trump wasn’t quite ready to give up on his number strategy throughout February as he continued to claim the situation was improving. There are plenty examples of Trump being irresponsible. Here are just a few:

On Feb 26, he said “We are going down, not up. We’re going very substantially down, not up.”

On Feb 27, he bragged: It’s going to disappear one day, it’s like a miracle, it will disappear.”

On Feb 29, he said a vaccine would be available “very quickly and very rapidly” He praised his administration’s actions as “the most aggressive taken by any county.”

The case for Trump’s negligenceis the mishandling of the test kits that were sent to laboratories around the country that had a technical flaw and didn’t work. Trump and his team weren’t worried and ordered the CDC to find a work around. The Trump administration also didn’t turn to the World Health Organization for its perfectly functioning test, nor did it remove regulations that prevented hospitals and labs from developing their own tests. Why? Trump remained intent on keeping the U.S. body count low.

Despite mishandling the production of test kits, Trump continues to make dangerous false statements.

On Mar 6 Trump said “Anybody that wants a test can get a test.”

I could go on and on but this sums things up:

The mishandling of this crisis is reflected in the raising death count that was in the hundreds and now over a thousand. Why hasn’t he used the Defense Production Act to force companies to produce masks, protective equipment and ventilators which are in short supplies? Does Trump even care how many Americans are going to die? He just wants businesses to re-open in time for Easter hoping that a strong economy and raising stock prices will get him re-elected. He should resign!!!

All state and local governments should ignore Trump’s call to re-open businesses! If not, then what is happening in Italy is only a few weeks away from happening in America.

Stock market watchers are expecting a rate cut this week because they believe that the U.S. economy is experiencing a slowdown. Second quarter GDP growth was 2.1% which is lower than the 3.1% growth rate during the first quarter. However, consumer spending rose 4.3% despite the fact that tax refunds were smaller than previous years. The GOP tax cuts did increase the weekly take home pay for consumers which accounts for some of the strong spending.

Growth deceleration in the second quarter was due mostly to tariffs and a fear of a global slowdown. China’s economic growth has slumped to its lowest level in nearly three decades due to the prolonged trade war with the United States. However, the biggest drag on the U.S. economy has been a slump in business investment which was down 5.5 percent.

It is hard for corporations to spend money with Trump’s tariff threats on most of its trading partners. The new NAFTA or USMCA hasn’t even been approved by Congress; then add the uncertainty of a smooth Brexit (Britain leaving the European Union) and you a recipe for a slowdown in business spending. In reality the Trump administration is partly to blame for the slump in world economic growth.

In order for the Trump administration to win the trade war they need interest rate cuts in order to lower the value of the U.S. dollar so that their tariffs are more effective. China can easily lower the value of their currency compared to the U.S. because the Federal Reserve is an independent agency.

Why I believe that lowering U.S. interest rates is a bad idea!

Trump has relentlessly used social media to criticize the Fed. To remain independent, the Fed has to resist political pressure.

Unemployment is at the lowest level in decades; the economy doesn’t need more stimulus.

Lowering interest rates will enable Trump to pursue a more aggressive use of tariffs which in turn will further slow world economic growth.

Cheap money will allow corporations to buy back more of their shares adding debt to their balance sheet.

Low interest rates will encourage more wasteful government spending, adding to the already large national debt.

Pension plans will get less interest on fixed income investments making it more difficult to meet their monthly commitments.

Consumers will get less interest on their savings accounts.

Conclusion: Cutting interest rates could make matters worse. It could prolong the trade war with China and enable the Trump administration to actually follow through with threats of imposing more tariffs on their other trading partners.

Investors consider tariffs and the trade war as only being temporary. A U.S. – China trade deal, will sound the all clear signal for markets and the economy. But there are indications that we may be in for a longer, more prolonged set of trade battles. A Trade War could last as long as Trump remains in office.

Consider:

U.S. steel and aluminium tariffs remain in place even after the U.S. signed a new trade deal with Mexico and Canada on Sept. 30.

The administration wants to retain the ability to slap punitive tariffs on China permanently as part of a new trade deal.

The administration is moving to institute $11 billion in tariffs on European aviation imports, and there are concerns that the next step is tariffs on European auto imports.

Bank of America Merrill Lynch global economist Ethan Harris has said he expects trade wars to continue over different issues and with different trade partners, even if there is an agreement with China. “The trade war is not going to go away during President Trump’s tenure in office. I think it will go through periods of hot war and cold war,” he said.

There are political and economic reasons for a long trade war.

On the political front, Trump campaigned on reviving U.S. manufacturing, reducing trade deficits and making better trade deals. A continued pitched battle with U.S. trading partners shows his political base that he is fighting for them in hopes of being re-elected. Also, the trade hawks in the Trump administration want some form of permanent tariffs in place and welcome trade battles.

On the economic front, the Trump administration believes that tariffs are a good negotiating tool to force countries to eliminate unfair trade practices. The goal is giving U.S. industries protection to redevelop and gain market share back from China and other low-cost competitors.

Unfortunately, temporary tariffs won’t work. It’s clear that a manufacturing revival requires substantial investment and it takes a lot of time to move plants back to the United States. Capital will only flow to these industries if it believes its protections from cheap foreign goods is permanent, not temporary.

Share buybacks are at all time highs, a sign of low business confidence.

Year to date, the North American stock markets have been steadily rising. However, first quarter earnings estimates have been reduced and disappointing results could spark a market correction. Fund managers have been getting defensive as one of best performing sectors during the past 12 months has been utilities.

Timing the market is next to impossible but investors are still buying on rumors of a U.S. – China trade deal and probably sell on news. You may want to avoid putting any new money into the markets or raise some cash and wait for a better buying opportunity.

Let me start with Larry Kudlow, the Director of the National Economic Council, who said back in April of 2018 that he believes the U.S. tax cuts could generate GDP growth of 5 percent annually for a short time. The U.S. economy did manage a 4.2% GDP growth in the second quarter of 2018 but the annual rate was only 3.1 percent. Sorry, forever Trumpers but Obama had 2.9% GDP growth in 2015 without the tax cuts.

GDP growth projections even fooled the Federal Reserve which signaled three rate hikes for 2019 but the slow down in world economic growth has forced the Fed to put any more rate hikes on hold. Market watchers believe there is a strong possibility that the Fed may have to cut rates if U.S. growth continues to slow down.

April fools : Tax cuts will for pay themselves

The budget deficit grew 77 percent in the first four months of fiscal 2019 compared with the same period in 2018, the U.S. Treasury reported earlier this month. The total deficit was $310 billion up from $176 billion over the same four-month period a year earlier. The cause of the massive increase, according to Treasury officials: tax revenues fell dramatically and government spending increased significantly. Even worse news is that the budget deficit is projected to exceed $1 trillion in 2020.

The national debt, which has exceeded $21 trillion, will soar to more than $33 trillion in 2028, according to the non-partisan Congressional Budget Office (CBO). By then, debt held by the public will almost match the size of the nation’s economy, reaching 96 percent of gross domestic product, a higher level than any point since just after World War II and well past the level that economists say could court a crisis.

Trump campaigned on a promise to shrink the country’s trade deficit, arguing loudly during campaign stops before and after taking office that bad trade deals have allowed other countries to take advantage of the United States. Trump imposed tariffs as a way to reduce the trade deficit with America’s trading partners.

April Fools: Imposing tariffs will reduce the U.S. trade deficit

The U.S. trade deficit hit a 10-year high in 2018, growing by $69 billion, according to figures released March 6 by the Census Bureau. Trump’s constant verbal blasts and a number of arm-twisting PR stunts focused on efforts to revive American manufacturing and reduce dependence on imported goods such as steel and other materials failed to produce any meaningful results.

Trump promised to scuttle all those bad trade deals and replace them with pacts that would re-energize our country’s manufacturing sector. Very little has happened on any of those items during the past two years.

Yes, Trump pulled the United States out of the Trans-Pacific Partnership and renegotiated the North American Free Trade Agreement, both of which he called some of the “worst” deals”, and he’s currently pursuing separate deals with China and the European Union.

It’s important to note, however, that Trump has signed just one new trade deal, with South Korea. The NAFTA replacement, known as the US-Mexico-Canada Agreement, still needs to be approved by Congress and lawmakers on both sides of the aisle have raised concerns. Canada and Mexico will not ratify the new agreement unless the U.S. remove the tariffs on steel and aluminium

So far, engaging in trade wars with just about any country America does business with has not delivered promised results of more jobs for U.S. workers. Companies are not relocating manufacturing plants back to America.

Is there any hope for a Santa Claus rally this year? What are the chances the markets could reverse the worst December since 1931?

A Santa Claus rally, which would begin on Monday, is a very specific event. It is the tendency for the market to rise in the last five trading days of the year and the first two of the New Year. According to the Stock Trader’s Almanac, it is good for an average gain of 1.3% in the S&P since 1950.

What caused the Dow Jones Industrial Average to have its worst week since the financial crisis in 2008, down nearly 7 percent and cause the Nasdaq to close down into bear market territory?

The Federal Reserve’s rate hike on Wednesday drove the losses this week and investors were hoping for a more dovish tone regarding future rate hikes. Despite the fact that Chairman Powell reduced the projected number rate hikes from three to two and reduced the neutral rate to 2.8% from 3%.

In my humble opinion, President Trump is partly to blame for the severity of the losses this week due to his criticism of the Fed. He backed Powell into a corner and forced him to show that the Fed is an independent institution. (the Fed could have put more emphasis on being data dependent) According to some reports, Trump has also discussed firing Powell privately because of his frustration with stock market losses in recent months.

In an extensive interview at the White House on Thursday, Trump’s trade adviser, Peter Navarro said that it would be “difficult” for the U.S. and China to arrive at an agreement after the 90-day period of talks unless Beijing was prepared for a full overhaul of its trade and industrial practices.

Political chaos in Washington with partial government shutdown, sudden withdrawal of troops out of Syria and the resignation of Defensive Secretary Mattis.

Investors are still worried about:

A slowdown in economic growth as more companies scale back their sales growth and profit outlook for 2019

Fear that a flat yield curve will invert if the Fed continues to hike short-term interest rates

The unwinding of the Fed’s balance sheet will reduce the availability of credit for corporations

The trade war with China will escalate causing more inflation

More economists are jumping on the recession bandwagon for 2020

Political chaos in Washington will get even worse when the Democrats take power in January

A dead cat bounce is a possibility in January

A dead cat bounce is a small short-lived recovery from a prolonged decline or a bear market that is followed by the continuation of the down turn. You need nerves of steel to trade a dead cat bounce but for long-term investors it could be a good time to reduce market risk and re-balance your portfolio.

It has been a couple of months since my last blog post. Upheaval in U.S. politics makes writing a financial blog very difficult. Who wants to read about financial issues when history is being made in U.S. politics.

I was in University during Watergate and watched as President Nixon was forced to resign. I remember his famous speech “I am not a crook.” Could history repeat itself with another President leaving office in disgrace?

According to the Washington Post, Trump has made 6,420 false or misleading claims over 649 days. Fact checking departments have been working overtime trying to keep up will all the misleading claims made by President Trump. The King of lies has been dominating all forms of media.

No collusion with Russia, yet 16 people have interacted with Russians

Former Trump campaign chairman Paul Manafort

Senior Trump campaign official Rick Gates

Former national security adviser Michael Flynn

Trump’s son Donald Trump Jr.

White House senior adviser Jared Kushner

Trump campaign adviser George Papadopoulos

Former Trump campaign adviser Carter Page

Former Attorney General Jeff Sessions

Trump campaign official JD Gordon

Former Trump campaign adviser Roger Stone

Former Trump campaign aide Michael Caputo

Trump associate Erik Prince

White House official Avi Berkowit

Former Trump attorney Michael Cohen

White House senior adviser Ivanka Trump

Trump business associate Felix Sater

Less than two years into Trump’s presidency, his business associates, political advisers and family members are being probed, along with the practices of his late father. On Friday, Interior Secretary Ryan Zinke became the fourth Cabinet member to leave under an ethical cloud.

His former campaign chairman Paul Manafort is in jail. His former attorney and “fixer” Michael Cohen is headed behind bars next year. His deputy campaign chairman Rick Gates is now a confessed felon. George Papadopoulos, a former member of his foreign policy advisory board, just got out of jail after flipping. His former national security adviser Michael Flynn may only avoid prison after turning on his former boss.

More inquiries into the Trump’s campaign, Trump’s transition, Trump’s inaugural committee and Trump’s presidency are now under active criminal investigation. The Trump Organization and his Foundation are also under civil investigation. Trump University has already been deemed a fraud.

Now that the Democrats have control of the house of representatives, more oversight will spark even more investigations of the Trump administration in 2019. No end in sight to U.S. politics dominating all forms of media.